The call comes on the back of new survey evidence highlighting the UK' s unique dependence on internal finance for investment, helping to explain why UK levels remain below those of our competitors, hindering attempts to close the productivity gap.The proposals are contained in a joint budget submission to the Chancellor by EEF, the manufacturers' organisation, along with 19 other bodies from across the manufacturing spectrum
EEF Director General, Martin Temple, said:
"The UK' s longstanding failure to achieve high levels of manufacturing investment has proved to be a significant reason for the continuing productivity gap with our competitors and our ongoing untapped business potential. With conditions improving, the Chancellor now has a real opportunity to grasp the nettle and help tackle a structural problem that has dogged industry for decades."
The proposals are backed by evidence showing how UK firms are more dependent on internal finance to finance investment than competitors (93% from internal sources). As a result, the level of investment in the UK is likely to be cut back far more quickly and more sharply than elsewhere during an economic downturn, as shown by manufacturing investment falling to a record low during 2003. The survey also showed that half of firms that cut investment find it hinders their performance.
As a result, EEF believes the severity of the problem and the UK' s uniquely high level of dependence on internal finance now requires direct action through the tax system.
It has proposed converting capital allowances into a tax credit system. The key difference would be that firms not in profit would still receive a financial incentive to invest through the credit, whilst a firm in profit would benefit from the credit in the same as it currently does from a capital allowance. The credit would also apply to leased assets which are an important source of finance for SMEs.
EEF believes this proposal would help address the shortage of internal finance and would have the advantage of simplicity and flexibility as well as promoting investment and economic stability through downturns.
"This structural fault of low investment in the UK has developed through a lack of confidence. Confidence on the part of manufacturers to borrow externally and confidence on the part of lenders to make finance available, with reasonable rates of return, because of the historical underperformance of the sector.
"Direct action in the short term will help break this cycle of fear on both sides whilst longer term confidence is being built and profits released" said Mr Temple.
In addition, EEF has also proposed the following in its submission:
the removal of the age based funding cap for Modern Apprenticeships and greater resources for careers guidance
new initiatives to encourage a greater focus on rehabilitation at work and tackle the UK' s growing claims culture
action on pensions including a more definitive timetable for replacing the Minimum Funding Requirement, a higher lifetime limit than the currently proposed £1.4m for tax treatment of an individual' s pension fund and the ability for employers to recover part of the Pensions Protection Fund from pensions scheme members.
the level of emissions trading to be set in line with our international commitments and those set by our EU competitors